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Behavioural Finance: Insights into Irrational Minds and Markets


\"In his splendid handbook for institutional investors, James Montier combines the insights he has gained as a practitioner, with the insights he has gleaned reading the academic literature in behavioural finance. Most importantly, Montier identifies key lessons to help institutional investors mitigate their susceptibility to psychologically-induced errors and biases". Professor Hersh M. Shefrin, Leavey School of Business & Administration, Santa Clara, University

"Behavioural Finance is unique in combining in a practical way the insights of a very experienced investment practitioner with a very readable review of what the research evidence tells us. This book is essential reading for all serious students of market behaviour and any investor wanting to know how behavioural finance can be used to enhance investment returns". Professor Richard Taffler, Head of Finance and Accounting, Cranfield School of Management, UK

"Behavioural finance abandons the assumptions of investor rationality and suggests that people do make mistakes in a consistent and predictable manner. Investors need to understand the herd if they want to make sense and profit from today's markets. James Montier's accessible book soundly guides the reader from behavioural finance theory to application. Don't grapple with the academic literature - just read Montier". Christian E Elsmark, Investment Director, JPMorgan Fleming Asset Management

James Montier (London, UK) is the Director of Global Strategy at Dresdner Kleinwort Watterstein. Prior to this, he was director of investment strategy for Old Mutual Securities.


1. Psychological Foundations.


Biases of Judgement or Perception is Reality.

Errors of Preference or There is No Such Thing as Context-free Decision Making.


2. Imperfect Markets and Limited Arbitrage.


Ketchup Economics.

Efficiency and LOOP.

Stock Market.

Other Markets.

Imperfect Substitutes.

Limited Arbitrage.

Positive Feedback Trading.

Risk Management and Limited Arbitrage.

On the Survival of Noise Traders.

Informational Imperfections.


3. Style Investing.


The Data.

The History.

Potential Gains to Style Rotation.

Life Cycle of an Investment Style.

Value vs. Growth: Risk or Behavioural?

Style Rotation.

Quantitative Screens.

Timing the Switch.


4. Stock Valuation.


Keynes' Beauty Competition.

The (Ir)relevance of Fundamentals.

Valuation and Behavioural Biases.

Cost of Capital.

Factors from Limited Arbitrage.

An Analyst's Guide.

5. Portfolio Construction and Risk Management.




Distribution of Returns.

Fat Tails or Outliers?

6. Asset Allocation.


Markets and Fundamentals.

Dividend Yield, Spreads and Ratios.

Earnings Yield, Spreads and Ratios.

Payout Ratio.

The Equity Risk Premium.

Should Corporate Financiers be Running TAA?

Market Liquidity.

Crashes as Critical Points.

7. Corporate Finance.


Irrational Managers/Rational Markets.

Rational Managers/Irrational Markets.


8. The Indicators.


Liquidity Measures.

Sentiment Measures.

Asset Allocation Measures.

Earnings Measures.

Technical Measures.


Final Thoughts.